Stocks Return to Earth, With the S&P 500 Nearing a Bear Market – The New York Times

The market has been producing double-digit returns for investors, even at moments of great national strife. But the party has ended and it may be a long time before it begins again.
The New York Stock Exchange on Wall Street, in an image made by a double exposure.Credit…Gili Benita for The New York Times
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Until very recently, the stock market seemed to defy gravity, producing double-digit returns that provided many Americans with financial comfort even as everything else crumbled around them.
When the pandemic began upending society, the market sank for a few weeks and then recorded one of the greatest rallies in history. Stock prices rose the day rioters breached the U.S. Capitol, and they were up during the week that protests roiled many American cities after the murder of George Floyd. During this time of great upheaval, the market seemed to flash a contrarian signal that things were going to be OK — economically, at least.
But real world problems have finally crashed the stock market’s party. Soaring inflation, fueled by rising food prices and the war in Ukraine, has prompted the Federal Reserve to raise interest rates significantly for the first time in many years, which has sent stock prices plummeting to earth.
Stocks rose 2.4 percent on Friday, but not enough to make up for a week of declines. It was the sixth consecutive week of losses for the stock market, the first time that has happened since 2011. The S&P 500, which has been flirting with a bear market, or a drop of 20 percent, is down more than 16 percent since its peak in January. It may fall further as inflation persists and a recession looms.
Even after the bleeding stops, stock market investors, who include more than 50 percent of Americans, could face years of relatively meager returns that will leave them with substantially less money to pay for their children’s college education and support themselves in retirement.
This reckoning comes just months before the midterm elections, deepening problems for Democrats who are already struggling to convince voters that their party and President Joseph R. Biden are steering the economy on the right track.
Former President Donald J. Trump often took credit for the stock market’s meteoric rise. Now, Mr. Biden and his party will almost certainly take some of the blame for its recent fall.
In reality, the stock market is not a perfect measure of the real economy. Unemployment is low and consumer spending is still holding up, but more than a month of punishing losses can damage the country’s financial psyche.
“People look at the stock market as a barometer of the economy and how they are faring financially,” said Mark Zandi, chief economist at Moody’s Analytics. “They feel good when they see green on the screen and crummy when they see red.”
Years of low rates have been rocket fuel for stock prices, partly because other investments, like bonds, that are pegged to interest rates produce such minimal returns. The stock market became one of the few places where investors could make big money.
During the pandemic, rates went even lower, as policymakers sought to support businesses and consumers through the shutdowns — and it worked. Investors piled into companies’ stocks and kept them flush with capital, which allowed them to keep hiring, paying rent, ramping up production and, of course, rewarding shareholders with ample dividends and stock buybacks.
But inflation, which puts a heavy burden on families trying to make ends meet, also helped kill the market’s mood. Steadily rising food costs and record high gasoline prices prompted the Fed to raise rates and try to slow the economy.
Wall Street has been expecting this moment to come for a long time. But the market’s reaction — which some refer to as a “reset” and others call a necessary “comeuppance” for stock investors — is painful nonetheless.
“I don’t think people recognized how fragile of a foundation the stock market was resting on,” said Emily Bowersock Hill, founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion.
Ms. Hill said some of the declines were probably good for the market because it was clearing out the froth that created the conditions for “meme stocks”: companies with dubious business prospects like AMC Theatres, BlackBerry and Bed Bath & Beyond, whose share prices were driven up by speculators.
But the downdraft has sunk the share prices of companies that represent innovation and the future, too; Amazon is down more than 30 percent since the start of the year and Alphabet, Google’s parent, is off about 20 percent, as investors rethink those companies’ real value.
Virtually no stocks have been spared from losses. The market decline has “gone on and on, and it’s depressing,” Ms. Hill said.
Perhaps no one understood that emotional symbolism of the market better than Mr. Trump.
“The reason our stock market is so successful is because of me,” Mr. Trump said in November 2017 — one of many statements in which he boasted about rising stock prices or publicly pressured the Fed to further lower interest rates to juice the economy.
Early in the pandemic, in April 2020 — with stores, offices and churches shut, children marooned at home attempting remote school, and morgues running out of space for virus victims — Mr. Trump tweeted that the United States had “the biggest Stock Market increase since 1974.”
While a majority of Americans have some money invested in the stock market, it remains a rich person’s game. According to an analysis by the New York University economics Professor Edward Wolff, the top 5 percent of American wealth holders own 72 percent of all stocks.
But the stock market’s symbolic value matters. “It’s the one story that makes the news every night,” said Richard Sylla, a professor emeritus of economics at New York University’s Stern School of Business.
Is the market up or down? Are we winning or losing today, this week, this year, this presidency?
On Friday, the University of Michigan’s consumer sentiment index fell lower than expected, a drop that some economists attribute partly to stock market losses. The index is now 13 points below the low when Covid first hit, noted Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. Such deep pessimism “suggests that people have short memories,” Mr. Shepherdson wrote in a research note.
It also suggests trouble for the Biden administration. Not only is the stock market party ending under President Biden’s watch, it could be a while before another one gets going.
Mr. Sylla, who co-wrote a book about the history of interest rates and tracked two centuries of stock market returns, correctly predicted in September 2011 that the coming decade would produce high returns.
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
But returns in this decade, he said, will be more “muted.” Even when the market stops falling, there will probably be no big broad rebound like there was after the first months of the pandemic.
Many analysts expect low-single-digit annual returns, about 5 percent, for the next few years — a huge letdown from the roughly 17 percent average annual return that the S&P generated in the decade leading up to the start of this year.
“If there is one good thing to say about the stock market getting a comeuppance, it is that people who were not so well treated by this economy might take a little schadenfreude,” Mr. Sylla said. “After years of the rich getting richer and the poor getting poorer, now nobody is going to be getting much richer from stocks.”
Ms. Hill said there was a generation of investors, who entered the market in the past five years, who had known mostly big gains.
Even when the market would fall a few percentage points, investors got accustomed to “buying the dip,” investing aggressively on a day of big losses and betting correctly that the share price would rally and keep going higher. But that strategy may not work as well in the coming years.
Ms. Hill sees no easy moves that President Biden could make to control inflation, which is unnerving investors and contributing to the market’s malaise.
Trying to tamp down wage growth — a driver of the inflation — would be politically unpalatable for a Democrat, and the war in Ukraine, which is pushing up the price of oil, natural gas and commodities like wheat, seems like it could go on for some time.
Although pensions and other investment professionals have been preparing for a period of substantially lower returns, Mr. Zandi said it was likely to come as a shock to casual investors, who have expected their retirement nest eggs to grow at a pace they have come to take for granted.
“The average American household hasn’t probably thought about it this way,” he said. “Most people may think that future returns are what they had in the recent past. They will be surprised.”
And with that adjustment, Mr. Zandi predicts that the stock market’s symbolic value will also be diminished.
“For the last 30 years, the stock market has been where all the action has been,” he said. “As it gets less exciting and the returns more pedestrian, its role in our financial life will not be as large. It’s going to lose its cachet.
“Something else will take its place. But I am not sure what that will be.”
William P. Davis contributed reporting.

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